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Despite Bubble Talk, Candy Crush Thud, IPO Market Shined In Q1

Candy Crush maker King Digital went public with a thud, but that doesn't mean the IPO market is in store for a blowup.(AP Photo/Richard Drew)

The appetite for new public companies remained strong in the first three months of 2014, even as worries about excessive enthusiasm and the broader market’s scuffle prompted hand-wringing.

Despite concerns about companies going public at lofty valuations, the U.S. IPO market is off to an even faster start in 2014 than it had in 2013, which marked the best year since the dot-com bubble burst. According to data from IPO research firm Renaissance Capital, 64 IPOs have priced in the U.S. this year, more than double the first quarter a year ago, raising $10.6 billion, a 39.5% increase.

Perhaps more importantly, the average IPO is up 24.6% from its offer price, a performance that should be enough to keep interest in the market for new offerings given the broader market’s meager showing. The S&P 500 rose 0.8% for the first quarter, while the Nasdaq eked out a 0.5% gain and the Russell 2000 inched 0.8% higher.

Among the best performing deals of Q1: early-stage biotech Ultragenyx Pharmaceuticals, which has doubled since late January, corporate-software startup Varonis Systems, enjoying a 60% rally, and Coupons.com, which is up 59% after doubling on debut day and stumbling since.

They weren’t all winners though. Candy Crush maker King Digital was a standout for all the wrong reasons, dropping 16% upon its March 26 debut and failing to make up any ground in its first week on the market. The mobile game maker found itself on the defensive about being a one-hit wonder and lumped in with disappointing Zynga, which has disappointed investors since it hit the market in December 2011 .

The argument that IPOs are in a bubble is flawed for a number of reasons, but one of the biggest is the relative maturity of the companies going public. Thanks to the financial crisis and the IPO deep freeze that resulted, many of the market’s new entrants have a longer track record and in several cases, including King, they can actually show solid profits. That’s a far cry from the dot-com bubble when a business plan and a web address could result in a multi-billion dollar valuation.

Companies going public in 2014 have been around an average of 13 years, the shortest average track record since 2008, but hardly a sign that companies are being rushed to the public market.

Are some of the eye-popping valuations being afforded to young companies excessive? No question. Will there be deals that look great out of the gate only to prove disappointments? Surely, but those trends do not a bubble make. The debate around whether the IPO market is overheating is a sign that investors are aware of the trend.

Renaissance Capital’s Kathleen Smith acknowledges that 66% of IPOs this year are for unprofitable companies. “This is pretty close to the 1999-2000 when about 75% were unprofitable,” she notes, but taking out the “unusually active” biotech sector drops that rate to just 37%.Biotech stocks, particularly early-stage companies, have fallen back to Earth in 2014 after a torrid two-year stretch. (See “Biotech Stock Boom Hits New Heights.”)

While a few high-profile disappointments might slow things down, the much more important signal will be performance, both of the market at large and new entrants in particular. As long as those figures stay positive, some level of appetite for debuting companies should remain in place.

The pipeline for the months ahead is certainly robust enough to fill whatever demand exists. According to Renaissance Capital the 103 IPOs filed in the first quarter marked a 178% increase from a year ago. With the JOBS Act allowing some companies to file confidentially – Twitter, for one, took advantage of the opportunity last year — the total number of potential deals is even larger. Some to keep an eye on in the second quarter and the rest of 2014:

Alibaba

The Chinese Internet giant said in mid-March that it has decided to list its shares in New York rather than on its own turf, and its offering will almost certainly be the largest since Facebook’s in 2012. It could even surpass the $16 billion raised by the social network. Interested parties, including shareholders of YahooYahoo, required to sell down part of its stake in the offering, will be more interested in the resulting valuation, which could tip the scales at more than $150 billion.

Virtu Financial

The high-speed trading firm could mint a new billionaire in CEO Vincent Viola, but its business is also under increased scrutiny following the release of Michael Lewis’ new book Flash Boys, in which the Moneyball author alleges high-frequency trading has essentially rigged the stock market in a way that harms average investors. Virtu’s filing revealed the firm had only a single day of trading losses over a five-year stretch.

Ally Financial

Pricing soon, the former GMAC still counts Uncle Sam as a major shareholder. The Treasury Department plans to sell a hefty chunk of its remaining 37% stake in the offering though, and could drop its ownership interest below 20%.

Box

The online storage company looks set to beat rival Dropbox to public markets after officially filing last week, but there are concerns about its money-losing ways. Like Facebook, the company will employ a dual-class share structure that cements control in the hands of pre-IPO investors and management.

GrubHub

Set to debut in early April, the food delivery company – which resulted from the merger of GrubHub and Seamless – upped its IPO range Tuesday in what is usually a signal of strong demand. The stock is currently set to fetch between $23 and $25.

La Quinta

The hotel operator is the latest company from the pre-2008 private equity buyout boom to resurface on the public market, with an early April offering expected to raise more than $700 million. The company was taken private in 2006 by Blackstone, which has fresh experience in the hotel space having taken Hilton Worldwide Holdings public late last year.

Ares Capital Management

There has been a drought in IPOs from private equity firms since Carlyle Group debuted in 2012, but Los Angeles-based Ares is aiming to end it after filing for a public offering March 31. The company, which has about $74 billion under management, counts a piece of retailer Neiman Marcus among its holdings after a 2013 buyout.

Spotify

The music streaming service has been said to be exploring an IPO for later in 2014. With public comparable Pandora Media up almost 20% despite concerns about a growing competitive threat from the likes of Apple, there seems to be plenty of investor appetite for the space.

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